Your Investments: Are you financially literate?

‘Unfortunately, far too many millennials
trying to cope with these economic conditions
have low levels of financial literacy and are
wrestling with concerns about their debt’

Invest in a Gold-1.
(photo credit:INVEST IN A GOLD)

A shocking study was recently released by the FINRA Investor Education Foundation, “The Financial Capability of Young Adults – A Generational View,” which showed a serious lack of financial knowledge and problematic financial behavior. Only 24 percent of millennials were able to answer four or five questions on a five-question financial literacy quiz correctly. And among young millennials – those 18 to 26 – only 18% were able to answer four or five questions correctly.

Here are the five questions (answers below):

1. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, would you be able to buy more than, exactly the same as, or less than today with the money in the account?

2. Do you think that the following statement is true or false: “Buying a single-company stock usually provides a safer return than a stock mutual fund.”

3. Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years, how much do you think you would have in the account if you left the money to grow: More than $102, exactly $102, or less than $102?

4. True or false: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest over the life of the loan will be less.

5. If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship? How did you do? If you didn’t score well, you are not alone. About four years ago Yale University researchers ran a similar quiz and found that only 34% of adults in their 50s answered all of questions correctly.

Bad timing

As if lack of knowledge isn’t bad enough, it’s coming on the heels of a very weak economic backdrop.

“Many millennials began their adult lives in the midst of the worst economic downturn in generations, and our survey reveals just how deeply and broadly the Great Recession has marked the financial lives of this generation of Americans,” FINRA Foundation president Gerri Walsh said.

“Unfortunately, far too many millennials trying to cope with these economic conditions have low levels of financial literacy and are wrestling with concerns about their debt.”

Don’t think that this problem is limited to the uneducated.

“There is nothing easy about finance,” said Annamaria Lusardi, a Dartmouth economist and visiting scholar at Harvard who studies financial literacy. “These are often difficult decisions for people who don’t have a lot of financial sophistication.

My research shows over and over that financial illiteracy is widespread, not only among the poor or uneducated, but even people with college degrees.”

What should you do?

Even if you don’t have the time to learn about these subjects, there are some basic things that can be done to help ensure that you don’t end up in financial hot water.

First of all, it’s a good idea to try to keep track of your spending over a month or two. Attempt to leave your fixed expenses at 50% to 60% of your income. This achieves two goals. First of all, if a large expenditure suddenly arises, you will have the money to pay for it. Many personal finance experts believe that you should keep four to six months of monthly expenses in an emergency fund.

Secondly, this gives you the chance to start saving.

Although it is not always easy to save on an Israeli salary, if you work for a company, this can be done through the firm’s kupat gemmel and keren hishtalmut. If you can manage to save even a couple of hundred shekels per salary, do it. This will only improve your financial situation; as your earning power increases, you will be able to save more.

If you are starting to save, or even if you have already been in the savings mode for years, or if you suddenly came into some funds, it’s important to save and invest your money correctly. As stated in one of the aforementioned questions, simply putting your money into the bank means that in the long run, it may possibly be worth less than its current value due to inflation. If you don’t know how to “invest correctly,” then it may pay to speak with a financial professional to make sure that your money works for you and not against you.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.

aaron@lighthousecapital.co.il

Aaron Katsman is a licensed financial professional in Israel and the United States who helps people with US investment accounts. He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.